Imagine putting all your investment money into your dream project. You buy the property, develop the land, build the apartments only to see a sluggish lease up period that falls well below your proforma. Nobody wants that. To help you avoid this, here are some tips on how to determine a good location for your investment property.
Job and population growth and the investment property
Job and population growth drive the housing market. The more growth there is in an area, the more demand there is for housing – and higher demand plus limited supply leads to increased rents and increased values. There are some markets that are generally stable due to a steady population increase; if you choose to invest in those markets, you should expect more protection on your investment (and possibly easier access to financing) as there is guaranteed demand.
Not only do you want to look at the population growth of a metropolitan area, but you also want to look at population growth within the zip code your considering. Savvy investors pass on deals in metropolitan areas with good jobs and economics if their research shows that a particular zip code or neighborhood is declining.
Population growth isn’t the only factor for good investment potential, either. Here are a few questions you might want to ask yourself:
- What does the number of jobs in your overall market look like? Are they increasing? Decreasing?
- The median salary: Increasing? Decreasing?
- What types of jobs are available: Professionals? High-tech? Laborers? Technicians?
- Job diversification: Are there 1 or 2 major industries or a stable variety of industries and sources of jobs?
Ideally, you would want to see a well-diverse source of jobs, a mix of workers, rising salaries, and low unemployment. A great source for population trends in your location is the U.S Census Bureau.
Housing Price Trends: be careful where you invest
Look into the housing market in the area you’re considering. Are prices going up or down? And look at the trend of median prices in the market and see how much prices have dropped from their peak to their low. It’s best to be at the forefront of market trends and buy when prices are at a low but beginning to recover. To identify if a market is in recovery or a market boom, you’ll want to look at how many homes are on the market, the month’s supply of inventory and how long is it taking to sell.
The months supply is the ratio of homes for sale to homes that sold. This indicates how long the current for-sale inventory would last given the current sales rate. During a slow real estate market, there are more homes listed than there are buyers. Conversely, in a strong market there are more buyers than sellers and property stays on the market for less time. Economists believe that 6 to 6 ½ months of inventory is market equilibrium – a balance between supply and demand.
Price to Rent Ratio and investment locations
The price to rent ratio is another simple way to financially evaluate the area for its overall economic efficiency.
To calculate the price/rent ratio, you take the median home price divided by the median annual rent. For example, if the area has a median housing price of $400,000 and a median yearly rent of $24,000, the price/rent ratio is 16.66 ($400,000 ÷ $24,000)
Typically, the lower the price to rent ratio, the better the market will be for investing. But, a location with a low price/rent ratio may be low for a reason, because it’s a bad location! The price/rent ratio is important, but don’t forget to look at other factors.
Convenience factors for choosing investment property
Some people choose to live further than 10 miles from jobs, shopping centers, restaurants and other community centers, but most people don’t. Access to public transit such as buses, trolleys, trains, etc. are important to your potential buyers or tenants. For families with children, public school districts are also an important factor.
Other convenience factors could include:
- Proximity to parks where one can exercise, relax and enjoy themselves
- Main streets lined with tall trees
- Sidewalk-lined boulevards
- Coffee shops, pubs, local shops
- Views of water, mountains or other scenery
Research has also found that the majority of the potential buyers or tenants in today’s market want the option to be able to walk to places rather than driving.
Walkability and property investment
Millennials currently make up the largest sector of renters and homebuyers (!), and this group is known for prioritizing open floor plans and location. They are inclined to favor cities or neighborhoods with a better walk score than those where transportation is required. Redfin released a study that showed more than half of millennials prefer walkable communities. If you’ve got walkability, you’ll see greater demand and higher selling prices.
Safety and Crime Rates
Your tenants and buyers are looking for a home where they feel safe. Plus, as a landlord, a high crime area can cost you more long-term, because of vandalizing, stolen A/C units and more. To study these trends, you can use a website such as Trulia and search for crime by location. It’s also best practice is to go visit the location you are considering for your investment. Look for signs of crime such as boarded houses or protective cages over HVAC units, etc.
Conclusion: go out and find your investment property
When it comes to real estate investing and selecting a property, the more information you have the better your decision will be, and the easier it will be to secure good financing, whether from a private money lender or from more traditional routes. This is a guide to help you choose the ideal location for your investment, and it’s important to apply these principles to your unique, local market.